Why do banks pay interest?

Answer: To attract deposits to lend

Required by law — Wrong. While banking is regulated, laws don't require banks to pay interest. Banks pay interest as a business strategy to attract deposits.

To attract deposits to lend ✓ — Correct! Banks pay interest to attract your deposits. They then lend that money to others at higher interest rates. The difference is their profit. For example, they might pay you 2% but charge borrowers 6%. You get paid for letting them use your money, they profit from the spread!

Reward loyal customers — Wrong. While customer loyalty matters, interest is not a reward program. It's a basic part of banking business model - paying for deposits to relend at higher rates.